Wednesday, 24 October 2012

Deal or No Deal?

I get asked frequently for my thoughts about the ongoing NHL collective bargaining negotiations.  I don't have a crystal ball and, like Don Fehr, have been out of the prediction business for a long time now.  That being said, I follow what is going on and do like to play around with the "what if's" in the back and forth between the two sides.  A big part of me thinks that overall, the NHL Clubs (large and small markets) would generally be better off on an overall economic basis without the current cap system. Free markets tend to work better in my view and avoid the need for all the complex mechanisms and rules that are layered into an artificial Cap economy - and which are bogging down these negotiations.   But a return to a free market system is not going to happen under Bettman's watch so discussion over on that front.

The NHL has left its latest offer open as the last chance for the parties to save a full 82 game season if the two parties can dot all the i's and cross all the t's this week. There has been some speculation that this remains possible given that (1) the NHL offer purported to address (but didn't really) one of the main "hot buttons" for the Players - namely, honouring all existing Player Contracts, and (2) one of the Players' counter proposals spoke of accepting a 50/50 split of revenues if the NHL otherwise agreed to maintain all the current "player contracting" issues the way they are currently dealt with in the expired CBA. Although the League immediately shot that counter proposal down, let's pretend that we can use those two positions as a jumping off point for a settlement.

Think of the business points that are being negotiated as being a series of concentric circles. The centre point is the Players' overall share of the pie or the so called Players' Share of hockey related revenue ("HRR"). That's what the main fight is obviously all about. The other aspects of the League's proposal are the concentric circles around it, which the League designs to compress the Players' Share (of HRR). Think of all those "player contracting" circles as having inward pointing arrows pressing down on the Players' Share in the innermost circle. We used to call those other CBA "contracting" elements "drags" on salaries because the League hoped that they would drag down the amounts that Clubs would otherwise be permitted to pay players. They really are, in many (if not all) respects, rules designed to prevent the Clubs from hurting themselves.

Set out below is a revised version of the NHL offer with some cutting and slashing, as well as some additional ideas that provide some food for thought in resolving some of the player contracting points.  If a compromise is only attainable with some ongoing "drags" in the system, then there are many ways to skin that cat. Some "COMMENTS" are included to provide some of the rationale for the changes but in many cases that rationale should be self-explanatory.

The revised proposal is accompanied by a table at the end showing the impact of using different percentages for the Players' entitlement to a share of future HRR growth if the parties choose to transition to a 50/50 split of HRR over the term of the new CBA while honouring all the existing player contracts. Those examples may be a bit simplistic but the capologists on each side can figure out how to tweak them to make them work.  So here we go....


“REVISED PROPOSAL” TO NHL PROPOSAL TO SAVE 82-GAME SEASON

 
1.         Term:

Six-year Agreement with mutual option for a seventh year.







2.         HRR Accounting:

·
Current HRR Accounting subject to mutual clarification of existing interpretations and settlements. Need to identify areas of dispute at this time and settle them.  Depending on whether any are major, all others could be set aside for arbitrator.

COMMENT: should not be a sticking point to a settlement

3. Applicable Players’ Share:

COMMENT: The following is an idea on how to settle the split of HRR between Players and Clubs, going forward, including as a key component, some additional required revenue sharing from the growth of HRR.
For example, if HRR was $3.782 billion in 2013/14 (based on 7% per annum growth in first two years of new CBA), and the IPS were to be increased by 20% of $479MM (3.782B –3.303B) or $95.8MM (call this the “Adjusted Player Share” or “APS”).  effectively, the Players’ % share of HRR for the 2014/15 season will then be 52.3% (1.883B plus 95.8M (for a total APS of $1.9788B) divided by 3.782B).
IV.  The percentage of HRR that the Players would be entitled to receive will never be allowed to be less than 50% for any season and would be set at that level once the Players’ share of HRR effectively reduces to 50%.

4. Payroll Range:
Payroll Range will be computed using existing methodology. For the 2012/13 season,  Player’s 2011/12 total comp of $1.883 billion to be frozen until it equals or exceeds 52% of HRR (the “Equalization Point”) , and the Payroll Range for each season will be computed assuming HRR will remain flat year-over-year (2011/12 to 2012/13) at $3.303 Billion (assuming Preliminary Benefits of $95 Million).2012/13 until the first season after the Equalization Point is reached  (see point 3 above).

·
Payroll Range until Equalization Point is reached:……………………
Lower Limit = $43.9 Million
Midpoint = $51.9 Million
Upper Limit = $59.9 Million

All existing player contracts are to be honoured at 100 cents on the dollar and ·
Appropriate “Transition Rules” will need to be put in place to allow Clubs to exceed Upper
Limit for the 2012/13 season onlyand subsequent seasons until the  Equalization Point is reached (but in no event will Club’s
Averaged Club Salary be permitted to exceed the pre-CBA Upper
Limit of $70.2 Million).
5. Cap Accounting:

League:
Payroll Lower Limit must be satisfied without performance
bonuses.

COMMENT: The issue of very long term, back-diving contracts, does not affect that many Players directly at this time.  They should be grandfathered under the new CBA and should not be accounted for on a punitive basis.
 All new SPCs with terms in excess of five (5) years will be accounted for and charged against a team’s Cap (at full AAV) only for those Players that are currently included for the purposes of the expired/current CBA.  In the event any such contract is traded during its
term, the related Cap charge will travel with the Player, but
only for the year(s) in which the Player remains active and is
being paid under his NHL SPC. If, at some subsequent point in
time the Player retires or ceases to play and/or receive pay
under his NHL SPC, the Cap charge will automatically revert  
(at full AAV) to the Club that initially entered into the
contract for the balance of its term.
Money paid to Players on NHL SPCs (one-ways and two-ways) in
another professional league will not be counted against the
Players’ Share, but all dollars paid in excess of $105,000 will be counted or against the NHL Club’s Averaged Club Salary
for the period during which such Player is being paid under
his SPC while playing in another professional league.
In the context of Player Trades, participating Clubs will be
permitted to allocate Cap charges and related salary payment
obligations between them, subject to specified parameters.
Specifically, Clubs may agree to retainallocate Cap charges and related salary payment
obligations between them  , for each of the
remaining years of the Player’s SPC, no more than the lesser of: (i) $3 million of a particular SPC’s Cap charge or (ii) 50 percent of the SPC’s AAV ( ( a “Retained Salary Transaction”). In
any Retained Salary Transaction, salary obligations as between
Clubs would be allocated on the same percentage basis as Cap
charges are being allocated. So, for instance, if an assigning
Club agrees to retain 30% of an SPC’s Cap charge over the
balance of its term, it will also retain an obligation to
reimburse the acquiring Club 30% of the Player’s contractual
compensation in each of the remaining years of the contract. A
Club may not at any point in time have more than two (2) current Player contracts as to which Cap
charges have been allocated between Clubs in a Player Trade,
and no more than $5 million10% of the then current Upper Salary Limit in allocated Cap charges in the
aggregate in any one season.

6. System Changes:







Entry Level System commitment will be limited to two (2) years
(
covering two full seasons) for all Players who sign their
first SPC between the ages of 18 and 2422 (i.e., where the first
year of the SPC only covers a partial season, SPC must be for
three (3) years).
Maintenance of existing Salary Arbitration System subject to:  (i) total mutuality of rights with regard to election as between Player and Club, and (ii) eligibility for election moved to five years of professional experience (from the current four years)..

COMMENT: Salary arbitration has not been a major factor in the current CBA and shouldn't be viewed as an issue to hold up a settlement.

Maintenance of existing Group 3 UFA eligibility rules, subject to the following changes:
COMMENT: The following rules are designed to provide some protection to Clubs vis-a-vis Group 3 Players but recognize that (1) the free agency rules in the NHL continue to be the most restrictive of any of the Big 4 pro leagues, and  (2) the Group 3 rules in the expired CBA were a big part of the Players' compromise for a cap system in 2005.
(a) age (i) 20-28: 8 years, (ii) 29, 7 years, (iii) 30, 6 years, (iv) 31 or older, five (5) years.

COMMENT: this compromise should largely protect against any of the "back-diving" problems in the expired CBA, but allows Players to continue to secure long term deals of more than 5 years in their prime years.

No
Limit on year-to-year salary variability on multi-year SPCs --
i.e., maximum increase or decrease in total compensation  
(salary and bonuses) year-over-year, except for players signing at age 31 or older.  For that category of player , variability limited to 5% of the value
of the first year of the contract. (For example, if a Player
earns $10 million in total compensation in Year 1 of his SPC,
his compensation (salary and bonuses) cannot increase or
decrease by more than $500,000 in any subsequent year of his
SPC.)

·
Re-Entry waivers will be eliminated, consistent with the Cap Accounting proposal relating to the treatment of Players on NHL SPCs playing in another professional league.

·
NHL Clubs who draft European Players (which for certainty, does not include a Euro born player playing in a N. American  junior league/college in the season prior to his draft year) obtain four (4) years of
exclusive negotiating rights following selection in the Draft. 
If the four-year period expires, Player will be eligible to
enter the League as aan Unrestricted Free Agent and will not be subject to
re-entering the Draft.

7. Revenue Sharing:
· NHL commits to Revenue Sharing Pool of $200 million for
2012/13 season (based on assumption of $3.303 Billion in
actual HRR). Amount will be adjusted upward or downward in
proportion to Actual HRR results for 2012/13. Revenue Sharing
Pools in future years will be calculated proportionately.  Revenue Sharing will also be adjusted as per point 3 above to allocate a set portion of the Clubs' entitlement to HRR growth to additional revenue sharing.
At least one-half of the total Revenue Sharing Pool (50%) will
be raised from the Top 10 Revenue Grossing Clubs in a manner
to be determined by the NHL.  At least x% of the total revenue sharing pool shall be paid to the bottom "X" (to be agreed) Revenue Grossing Clubs on an equal basis.The distribution of the Revenue Sharing Pool will be
determined on an annual basis by a Revenue Sharing Committee
on which the NHLPA will have representation and input.
For each of the first two years of the CBA, no Club will
receive less in total Revenue Sharing than it received in
2011/12.

Current “Disqualification” criteria in CBA (for Clubs in Top
 Half of League revenues and Clubs in large media markets) will
be removed.
Existing performance and “reduction” standards and provisions
relating to “non-performers” (i.e., CBA 49.3(d)(i) and 49.3
(d)(ii)) will be eliminated [and will be adjusted as per the
NHL’s 7/31 Proposal. – need to confirm what this entailed].


8. Supplemental and Commissioner Discipline:
 
Introduction of additional procedural safeguards, including
ultimate appeal right to a dedicated “neutral” third-party arbitrator with a “clearly erroneous” standard of review.(to be mutually appointed by NHLPA/NHL on same terms as grievance arbitrator)
for any discipline involving a suspension of more than 4 games .


9. No “Roll Back"
The NHL is not proposing that current SPCs be reduced,
re-written or rolled back. Instead, the NHL’s proposal retains
all current Players’ SPCs at their current face value for the
duration of their terms, subject to the operation of the
escrow mechanism in the same manner as it worked under the
expired CBA.
10. Players’ Share “Make Whole” Provision:

The League proposes to will  make Players with existing SPCs “whole” for theany absolute
reduction in Players’ Share dollars (when compared to 2011/12)
that is attributable to the economic terms of the new CBA (the “Share Reduction”). Using an assumed year-over-year growth rate of 5% for League-wide revenues, the new CBA could result in shortfalls from the current level of Players’ Share dollars  ($1.883 Billion in 2011/12) of up to $149 million in Year 1and up to $62 million in Year 2, for which Players will be “made whole.” (By Year 3 of the new CBA, Players’ Share dollars should exceed the current level ($1.883 Billion for 2011/12) and no “make whole” will be required.) Any such
“Share Reduction”). Any
“shortfalls” in Years 1 and 2 of the new CBA will be computed
as a percentage reduction off of the Player’s stated
contractual compensation, and will be repaid to the Player as
a Deferred Compensation benefit spread over the remaining
future years of the Player’s SPC (or if he has no remaining
years, in the year following the expiration of his SPC).
Player reimbursement for the Share Reduction will be accrued and, paid for and guaranteed by the League, and will be chargeable against Players’ Share amounts in future years as Preliminary Benefits. The objective would be to honor all existing SPCs by restoring their “value” (to be paid from league wide revenues to the extent of any shortfall).   All existing SPCs are to be honoured on the basis of the now existing level
of Players’ Share dollars.



 
Table relating to Point 3 above

ADJUSTED PLAYERS’ SHARE OF HRR

Players’ % share of HRR Growth after Threshold Season
HRR
2013/14 = $3.782B (assuming 7% growth in 2012/13 and 2013/14)
= $479M increase from 2011/12
HRR
2014/15
$4.047B = $264.74 increase from 2013/14
HRR
2015/16
$4.330B = $283.29 increase from 2014/15
Player Increase to IPS of $1.883B
APS for 2014/15
Player Increase to IPS
APS for 2015/16
Player Increase to IPS
APS for 2016/17
20%
$95.8 M
52.3%
$53 M
50.20%
$56.66 M
50% (minimum)
25%
$119.75 M
52.9%
$66.18 M
51.1%
$70.82 M
50% (minimum)
30%
$143.70 M
53.6%
$79.42 M
52%
$85 M
50.6%
35%
$167.65 M
54.22%
$92.66 M
52.9%
$99.15 M
51.76%
40%
$191.6 M
54.85%
$105.90 M
53.8%
$113.32 M
52.9%